Russia needs to come up with a new growth model

The scary part is inside the dotted square: GDP slowdown even with high oil prices. Morgan Stanley Russia's eyeing its second recession in just seven years.

This is no surprise: the 40% oil price drop slammed an economy whose energy sector makes up 20% of the GDP, and western sanctions added salt in the wound.

However, those are just the short-term obstacles that's Russia is facing.

"[T]he growth slowdown in 2011-2013, with oil averaging over US $110/barrel, reveals a structural component to the current slowdown," according to Morgan Stanley's Alina Slyusarchuk.

"Structural headwinds to growth including a shrinking and aging population, high capacity utilization, a flat oil production outlook with oil prices lower for longer and restrictive conditions for fixed investment mean that the government needs to look for new drivers of growth," she adds.

Morgan Stanely

So far, Russia has focused on a three-fold growth strategy that benefits its domestic producers (aka the oil and gas guys): import substitution, a weaker ruble, and a reduction in labor costs.

However, Slyusarchuk writes in her note:

"An import substitution policy is likely to restrict modernization and productivity growth in the medium term, as technological imports play an important role in domestic investment and the production process [and] is also likely to result in inflation pressures.

We see a risk that the policy of a weaker exchange rate will preserve the old structure of the economy, with a prevalence of export-oriented commodity-based sectors, while high-tech industries are likely to suffer."

As a result, MS analysts suggest that investment growth is the "key for successful import substitution and productivity growth."